CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped .......

[marmar]

The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero
Posted on January 8, 2015 by Yves Smith


So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries?

One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.

The Congressional Budget Office forecasts have enormous clout on the Hill. Yet as we’ve written, one of its most influential analyses, that of projected Medicare cost increases, was so rancid that two fiscal budgeting experts from the Fed roused themselves to write a lengthy academic paper demolishing it. That CBO work was so problematic on so many fronts, including that it violated CBO policies for the preparation of long-term forecasts in multiple ways, that it raises questions as to the intellectual honesty of the exercise.

In the case of the so-called swaps pushout rule analysis, the CBO came to a similarly dubious conclusion. We’ve embedded a report from the House Committee on Financial Services, which includes the CBO’s budget estimate on pages 5-6. The key bit is that “any impact on the cash flows of the Federal Reserve or the FDIC over the next 10 years would not be significant.” In budgetary terms, that is tantamount to saying it will have no cost.

This is absurd on multiple levels. There is an obvious subsidy to the banks here, otherwise Jamie Dimon would not have been lobbying personally to get the bill passed. FDIC insurance is widely acknowledged by banking experts to be underpriced, so increasing the risk held in depositaries, particularly of positions can and do go boom, makes the odds of going though the FDIC’s kitty even greater. ...................(more)

The complete piece is at: http://www.nakedcapitalism.com/2015/01/cbos-bad-math-putting-7-trillion-notional-value-derivatives-taxpayer-backstopped-depositaries-will-cost-zero.html

[chervilant]

1. And, $7 trillion is but a

SMALL fraction of the notional value of those toxic "assets."

[Jackpine Radical]

2. And it's only going to get worse

as the CBO starts using Republican accounting methods.

The pirates have invaded the government and are rearranging things to their own liking. Their first move was to disable the tiller, and they are now unbolting the compass so they can throw it overboard.

And the band played Waltzing Matilda.

[Lucky Luciano]

3. Notional doesn't mean much. What is the value of the derivatives?

Swaps usually start with a value of zero by construction.

I am sure zero is the wrong number, but $7T is also way wrong as the "value" or even pitential value of the derivs in question.

[sendero]

4. The problem is...

... that no one really knows what will happen under certain circumstances that the brain trust that creates/buys these things never considered. Like house prices dropping. Or oil prices dropping.

It's not a matter of "if" but "when" a serious derivative meltdown that has effects we cannot even imagine happens. I guess the Fed can always QE us out of it, maybe.

[Lucky Luciano]

5. Sort of my point - $7T doesn't mean much unless we know what the derivs are.

For example, if they were $7T notional of OIS swaps maturing in less than a year, I would rate that risk as minimal in all circumstances.